By Matt Valley
Until there is a greater sense of stability in the marketplace and clarity from the Federal Reserve on the timing and extent of interest rate cuts, underwriting deals will remain a challenge for lenders, believes Jason Clouet, vice president of Bayview Asset Management.
“I think if we polled everybody in this room, half of you would say that we’re going to see a 200 basis points drop, and half of the room would say 50 basis points. There’s not real clarity right now as far as where the direction is,” remarked Clouet during a capital markets panel discussion at InterFace Seniors Housing West in Los Angeles on Feb. 1.
“Once we reach the point that we know the direction of where everything is going — and that may be in the second or third quarter of this year — then all of a sudden everybody in this room will have a sense of how they can underwrite a deal and what lending is going to be available,” explained Clouet. “Then lenders will be able to change their credit box a little bit and their underwriting standards, and everything will loosen up.”
The ninth annual conference hosted jointly by France Media’s InterFace Conference Division and Seniors Housing Business took place at the Omni Los Angeles. The event drew 230 industry professionals. Joining Clouet on stage for the capital markets session were panel moderator David Boitano, managing director, Lument; Corley Audorff, senior vice president, Colliers Mortgage; Clint Johnson, senior vice president, BOK Financial; and Morgin Morris, senior mortgage banker, KeyBank Real Estate Capital.
Banks under the microscope
Since the failure of three large regional banks — Silicon Valley Bank, Signature Bank and First Republic Bank — in 2023, the U.S. banking industry has come under increased scrutiny.
“While larger banks are traditionally the targets of regulatory attention, midsize banks should prepare for new regulation — including liquidity, debt and capital requirements — as well as increased governance and risk management expectations,” wrote Deloitte in a 2024 banking regulatory outlook.
The Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have jointly proposed increased capital obligations for all banks with at least $100 billion of assets. More specifically, the proposal, known as the Basel III Endgame, forces the affected banks to increase their aggregate Tier 1 equity capital by 16 percent. For the largest banks that level rises to 19 percent. (Tier 1 capital can immediately absorb losses without affecting banking operations.)
An initial public comment period ended Jan. 16, but U.S. banking representatives and some members of Congress have subsequently raised concerns over the impact of the proposed changes on securitization and capital markets activity. There will likely be some back and forth between regulators and the lending community before the regulatory agencies eventually finalize the proposal and begin the transition to the new framework on July 1, 2025.
“Sometime in the next quarter, we’ll know for sure what the new federal regulations are going to be for capital reserves,” said Morris, making clear that KeyBank is still lending in the seniors housing space but that the “box” is a little bit smaller and that cash flow is a big consideration.
“A lot of folks are just completely pencils down because they have to be. They have to get into compliance with the new capital requirements. It’s just a big consideration across the entire banking platform,” explained Morris.
Colliers is proceeding cautiously, said Audorff. “We’re pulling back on the amount of proceeds and leverage that we’ll give, but we’re still in the business. We’re still closing construction and bridge loans. I just think that, as an industry, we’ve got a lot of things to work through in our [loan] servicing.”
BOK Financial is open for business in the seniors housing space, said Johnson. “We’re a commercial bank, federally regulated. Repayment, cashflow — all those things that were important to us before — are still important to us.” BOK’s healthcare lending group focuses primarily on skilled nursing, assisted living and memory care, according to Johnson. BOK has about $2.5 billion to $3 billion in outstanding loans in 42 states.
Pain relief for borrowers
A preliminary analysis of commercial mortgage bankers’ originations for 2023 shows activity was 47 percent lower than in 2022, according to the Mortgage Bankers Association. In the healthcare properties segment, mortgage bankers’ originations decreased 67 percent from 2022.
Boitano asked the panel what the keys are to helping boost lending activity industrywide. Morris said she would like to see a reduction in the short-term borrowing rate, which would provide some immediate relief to KeyBank’s clients in need of bridge financing.
“If we can give folks some relief in the cost of short-term borrowing, the SOFR piece, that might help relieve some capacity for banks to step in and be a bigger part of the equation,” said Morris.
With billions of dollars’ worth of debt coming due in the senior living industry this year, the higher interest rates are a major concern for lenders and borrowers.
The 30-day Secured Overnight Financing Rate (SOFR) has risen from 0.05 percent in early March 2022 to 5.3 percent today. The U.S. 10-year Treasury yield also spiked over the same period, rising from 1.7 percent at the beginning of March 2022 to nearly 5 percent in October 2023 before receding to its current level of about 4.25 percent.
But even an interest rate reduction won’t be enough to save the day in situations where the outstanding loan balance is higher than the value of the property, said Audorff. “You’ve got debt-service coverage issues and nowhere to go. Until we get through that, it’s going to be challenging, regardless of where rates are today.”
The silver lining is that many of Audorff’s clients have grown accustomed to lower LTV (loan-to-value) and LTC (loan-to-cost) ratios and figuring out on their own how to make these deals work. “I think we’ll still see lots of good deals get done, and high-credit-quality deals.”